Every business owner faces challenges that threaten to thwart his or her dream.
Many business owners expect to someday pass on their pride and joy, most likely to their children, but possibly to another family member, an employee or an outside buyer. This change in ownership is a common strategy to fund the owner’s retirement and carry his or her creation down through the generations.
But every business owner faces roadblocks that threaten to thwart his or her dream. Whether you or a family member owns a business, or you are in line to become an owner, here is a checklist of hazards you’ll want to avoid.
- Waiting too long to start planning. Many business owners leave succession planning until the last moment—if they plan at all. Yet an ideal succession plan requires laying the groundwork over many years. Some experts recommend planning your exit strategy from the day you start the business. How you want to leave the business tomorrow strongly influences how you structure and operate the business today.
- Assuming a family member will take over the business. While many children want to eventually take over the family business, not all do. Perhaps your child really wants to be a teacher, minister or doctor instead of the owner of a small factory. It’s critical to talk to your children about what they want for themselves. Encourage them to work in the business, but don’t pressure them. It’s not fair to them, and it will probably mean trouble for the business if you try to shove them into a role they don’t want. You’ll want to know every family member’s desires as soon as practical so you can pursue other avenues if necessary, such as selling to a valued employee or outside buyer.
- Dividing the business equally among heirs. Equal ownership among heirs is usually a recipe for disaster because different skills and visions inevitably lead to conflicts. Ultimately, one person needs to run the company. That’s why it’s so important to plan well in advance, to see who among your heirs has the talent, genuine desire and requisite skills to run the business. If a certain heir doesn’t want to be involved in the business, devise a way to gift that person other assets, or perhaps nonvoting shares in the business (though this, too, can lead to conflicts).
- Waiting too long to give real authority to the heir. Another common roadblock is waiting too long to give genuine responsibility and authority to a potential heir. Many owners never give it up until the day they retire—only to learn painfully that the child isn’t up to the task. Involve the person in your decisions and let him or her make real decisions. Let the future owner build relationships with vendors, employees and customers. After all, you made mistakes when you were starting and growing the business. Let the next generation make mistakes and learn from them, just like you did.
- Trusting your successor. This goes along with the failure to give your heir genuine authority. While you don’t want to trust someone blindly just because that person is family, don’t be so suspicious that you’re constantly peering over his or her shoulder. This creates an atmosphere of distrust. Whether you are working with a family member or an outside party, there is always a level of risk in leadership transition. An advisory (nonvoting) board is generally a productive way to establish a framework for communication and accountability without creating mistrust between generations.
- Not having your potential successor(s) work for another business. It is sometimes a good idea to encourage an heir to work a while for someone else before committing to the family business. This can be valuable training and can provide a clearer sense of whether that person ultimately wants to run the show.
- Being secretive about your plans. Business owners frequently play their succession plans close to their chest. Perhaps they’re worried about stirring up family conflicts or they just don’t like to talk about the family money. This is a disservice to your heirs and potentially a disaster for the company. The sooner you can reveal your plans, the sooner everyone can get on board. It also gives you time to modify the plan, if necessary. Keep all parties informed, perhaps through periodic family meetings.
- Dreading your retirement years. Retirement can be difficult for an entrepreneur because the business is often the all-consuming center of the owner’s life and personal identity. Without a clear sense of what you want to do in retirement, you will almost inevitably drift back to the family business, frequently meddling in how it’s being run—often to the detriment of the business and family relations. Planning on your own. Business succession planning is complicated (We haven’t even discussed tax issues here!) and fraught with landmines. Outside advice can be invaluable, particularly from someone who can lead family meetings and ease conflicts with knowledge, experience and an objective perspective.
- Avoiding the journey and looking for a cookie-cutter process. There are no short cuts to a successful business succession plan. It is more like a journey than a destination, and like many journeys in life, it can be fun and fruitful for all who go with you. From a distance, every family-owned business may look the same, but like snowflakes, no two are really alike when you look at them closely. That’s why it’s so important to create a customized succession plan that addresses your unique needs.
Finally, seek assistance. Professional advisors can provide valuable insights that address specific business and personal goals, reduce anxiety, and provide financial peace of mind. Ultimately, you are responsible for the changes your business will go through when you are no longer involved, but you don’t have to face the transition alone. No matter where you are in the process, an advisor can help you create a seamless plan that satisfies key stakeholders, keeps the business thriving and preserves your legacy. iBi
Michael D. McConnell and Jeffrey R. Bonick are principals at CliftonLarsonAllen. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor. For more information, visit claconnect.com/privateclient.